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China’s E-commerce Sector
Online Retailing in Transition October 2014
Fung Business Intelligence Centre
Fung Business Intelligence Centre The Fung Group is a privately held multinational group of companies headquartered in Hong Kong whose core businesses are trading, logistics, distribution and retailing. The Fung Group employs over 45,000 people across 40 economies worldwide, generating total revenue of more than US$22.6 billion in 2013. Fung Holdings (1937) Limited, a privately held business entity headquartered in Hong Kong, is the major shareholder of the Fung group of companies. The Fung Business Intelligence Centre, through its unique relationships, collects and analyses market data on China’s economy, with special reference to sourcing, supply chains, distribution and retail. It also produces reports on sourcing and trading in other Asian countries and has recently expanded its research services on the global retail industry, where unprecedented change is being driven by technological innovation, the advent of multi-sales channels and greater supply chain efficiency. Serving as a knowledge bank for the Fung Group, the Centre also makes its market data and analysis available to businesses, scholars and governments around the world. It is an impartial thought leader on issues shaping the future of manufacturing, distribution, logistics and retailing in China, and retailing globally. It regularly provides advice and consultancy services to internal and external clients.
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China’s E-commerce Sector
Online Retailing in Transition October 2014
Authors
Teresa Lam, Christy Li
Fung Business Intelligence Centre
Index
1 2 4
Introduction At a glance Key facts
10 10 11 11 12 16 17 18 20 20 23
Top 10 trends #1: M-commerce leaps in popularity, while s-commerce gradually emerges #2: China’s “diaosi” are set to become mainstream consumers #3: Leveraging Big Data and technologies for success #4: The rise of O2O #5: Online players strengthen logistics services #6: Chinese e-commerce players seek overseas listings #7: Chinese shoppers increasing favour “haitao” #8: E-commerce giants eye the fresh food market #9: Traditional industries jump on the online bandwagon #10: Online retails go rural; “Taobao village” a unique feature
24
Conclusions and implications
25 Endnotes
Introduction
Online retailing is at a tipping point, with the e-mobile Internet now behind the majority of its growth. Technological advances are also rapidly transforming China’s e-commerce landscape. Both opportunities and challenges abound. Realising the importance of the online channel in luring customers – particularly the new generation of consumers – sees increasing numbers of retailers embarked on their own mobile and social media strategies. They have embraced new technologies that include analytic tools, location-based technologies, in-store mapping services, RFID and QR codes, all in a bid to make shopping more convenient and attractive to their customers. At the same time, more retailers in China have started implementing “O2O strategies” (aka omni-channels), hoping to create a seamless experience across multiple marketing and sales channels. 2014 marks a big year for Chinese e-commerce companies embarking upon initial public offerings (IPOs) on foreign exchanges. In particular, Alibaba’s IPO on the New York Stock Exchange, the biggest in history, has taken the world’s attention. Alibaba’s IPO success is expected to entice its peers to follow suit. While China’s e-commerce sector continues to grow, several new developments are taking place. Increasing numbers of Chinese shoppers are taking part in international cross-border shopping. Furthermore, they are buying from increasing numbers of product categories online, from apparel and shoes to bags and accessories and to fresh food produce. As a result, the impact of e-commerce in China is becoming more significant than ever. Not only are many bricks-and-mortar retailers embracing e-commerce, but traditional industries such as the real estate, healthcare and automobile sectors, are also jumping on the online bandwagon. Last but not least, a growing number of small businesses in rural communities are leveraging e-commerce platforms to reach their customers. The rise of the so-called “Taobao village” is drawing increasing public awareness. In this newsletter, we identify the top 10 key trends in China’s e-commerce sector. We also address the implications for retailers hoping to gain a foothold in a vast—and growing— market. n
1
At a glance
2
Xinjiang 49.0% (13.7%)
Inner Mongolia 43.9% (13.3%)
Qinghai 47.8% (15.1%)
Shaanxi 45.0% (8.9%) Tibet 37.4% (13.9%)
Hubei 43.1 (7.9%)
Sichuan 35.1% (10.7%)
Guizhou 32.9% (15.6%)
Internet penetration by province, 2013 > 70%
Yunnan 32.8% (15.7%) Internet penetration rate Growth over 2013
> 60% > 50% > 40%
Province 32.8% (15.7%)
> 30% Data unavailable Source: China Internet Network Information Center
Guangxi 37.9% (11.9%)
Heilongjiang 39.5% (13.9%)
Jilin 42.3% (9.5%)
Chinese consumers are becoming increasingly connected, with Internet penetration reaching a high of 45.8% of the nation in 2013 (9.5% yoy growth), but a wide gap still exists between urban and rural populations:
Urban-rural internet penetration rates, 2008 - 2012 Liaoning 55.9% (11.6%) Beijing 75.2% (6.7%) Tianjin 61.3% (9.2%) Hebei 46.5% (12.7%) Shanxi 48.6%( 10.4%) Ningxia 43.7% (9.7%) Shandong 44.7% (12.0%) Henan 34.9% (15.0%) Gansu 34.7% (12.5%) Anhui 35.9% (15.0%) Jiangsu 51.7% (3.6%) Shanghai 70.7% (4.8%)
Chongqing 43.9% (8.2%) Zhejiang 60.8% (3.4%) Hunan 36.3% (9.5%) Fujian 64.1% (5.4%) Jiangxi 32.6% (15.9%)
Guangdong 66.0% (5.5%)
Hainan 46.4% (7.0%)
70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0
Urban
Rural
2008
‘09
‘10
‘11
Source: China Internet Network Information Center
‘12
3
Key facts
4
Market China’s online market: the world’s largest online market The transaction value of China’s online market increased by 39.4% yoy to reach 1.84 trillion yuan in 2013, accounting for 7.9% of the country’s total retail sales1. By 2017, total online sales are expected to reach 4.45 trillion yuan, accounting for 12.4% of the total retail sales.
Exhibit 1. Transaction value of online shopping in China, 2010-2017 (estimates) Billion yuan 5,000.0
yoy growth
75.3% 70.2% 68.3%
4,450.0 80.0% 3,790.0
4,000.0
39.4%
3,000.0
2,420.0 40.0% 28.9% 1,840.9 21.5% 1,320.3 31.5% 17.4% 20.0% 784.5
2,000.0 1,000.0
60.0%
3,119.0
461.0
0.0
0.0 2010 ‘11 2.9
4.3
‘12
‘13 ‘14e ‘15e ‘16e ‘17e
6.3
7.9
9.1 10.4 11.5 12.4
Online retail’s share of total retail sales (%) Source: iResearch, March 2014
Mobile shopping is gaining traction The mobile platform is now a highly popular sales and marketing channel. iResearch estimates the total transaction value of mobile shopping to exceed 3,207 billion yuan by the 2017, up from 274 billion yuan in 20132.
Exhibit 2. Transaction value of mobile shopping in China, 2011-2017 (estimates) Billion yuan
yoy growth
3,500.0 3,000.0 2,500.0
3,207.2 600.0% 426.1%
490.3% 297.4%
400.0
2,000.0 202.3%
1,500.0 1,000.0
1,615.6
828.2 95.1%
500.0 0.0
500.0
2,516.6
11.7
69.0
2011 ‘12
274.0
300.0 200.0 55.8%
27.4%
100.0 0.0
‘13
‘14e ‘15e ‘16e ‘17e
Source: iResearch, July 2014
Online transcations made via mobile devices on the rise Currently, around 70% of the transactions are made via PC and 30% via mobile devices. It is expected that the share of transaction on mobile device will exceed PC by 2016 – 52.7% on mobile device and 47.3% on PC3.
Exhibit 3. Share of transactions made on PC and mobile devices, 2011-2017 (estimates) Mobile devices
PC
1.5%
5.8%
14.5%
98.5%
94.2%
85.5%
70.0%
57.3%
47.3%
43.1%
2011
‘12
‘13
‘14e
‘15e
‘16e
‘17e
Source: iResearch, July 2014
30.0%
42.7%
52.7%
56.9%
Growth drivers Growing number of netizens drives e-commerce growth An expanding Internet population is a major driving force for the robust growth of e-commerce in China. China’s Internet population amounted to 632 million in 1H14, with a penetration rate of 46.9%, while the number of China’s online shoppers reached 332 million in 1H144.
5 Exhibit 4. Number of online shoppers and online shopping penetration, 2008–2013 Million persons 300.0
302.0 242.0
200.0 160.5
100.0
108.0
74.0 0.0
194.0
2008 24.8
‘09
‘10
‘11
‘12
‘13
28.1
35.1
37.8
42.9
45.8
Online shopping penetration rate (%) Source: CNNIC, December 2013
Increasing number of m-commerce users The number of m-commerce users reached 205 million in 1H14, up by 42% from 4Q13 and accounting for 32% of China’s total Internet population5.
Exhibit 5.Number of mobile shoppers and online shopping penetration, December 2013 – June 2014 Million persons 300.0
331.5
301.9
200.0
205.0 144.4
100.0 0.0
December 2013 48.9
28.9
June 2014 52.5
38.9
Mobile shopping penetration (%) Online shopping penetration rate (%) Source: CNNIC, July 2014
“Post-90s” are the main driver of online shopping Younger consumers, particularly the “post90s” generation show greater preference for mobile shopping6. In 2013, around 57% of the Internet population is under 30 years of age.
Exhibit 6. Chinese Internet users by age group, 2008-2025 (estimates)
Source: US Census, CNNIC, Jefferies estimates, July 2014
6
Consumer behaviour and preferences Average spending per online shopper has increased over the years, but growth rate is set to stabilise. The average spending per online shopper amounted to 6,098 yuan in 2013, up by 12% yoy; and the growth rate is expected to stabilize over coming years7.
Exhibit 7. Average spending per online shopper, 2007 – 2017 (estimates) Yuan
yoy growth
9,000.0
42.0% 41.0%
8,000.0
41.0% 35.0%
7,709
8,260
8,603 45.0% 40.0
6,877
7,000.0
18.0%
6,000.0
35.0
6,098
30.0
5,455
25.0
5,000.0 4,045
4,000.0 3,000.0 2,000.0 1,000.0
2,435 1,218
2,872
1,732
20.0 13.0% 12.0% 7.0% 12.0%
15.0 10.0 4.0%
0.0
5.0 0.0
2007 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14e‘15e ‘16e‘17e Source: iResearch, CNCIC, Jefferies estimates. July 2014
Apparel, bags, and accessories remain the most popular category bought online Apparel, shoes and hats constituted the most popular online retail category in 2013; 75.6% of the online shoppers have bought products in this category8.
Exhibit 8. Most popular categories online, 2013 Categories
People buying these items (%)
Apparel, shoes, and hats
75.6
Daily necessities
45.1
Digital products and accessories
43.3
Top-up cards
34.9
Bags
32.7
Cosmetics and skin-care products
30.6
Books, music, and videos
25.7
Consumer electronics
22.7
Food and health care products
22.4
Stationery
18.0
Source: CNNIC, April 2014
Price still the main reason for consumers to decide whether to buy online or via offline channels Over 70.3% of China’s online shoppers would consider “commodity price” when choosing whether to buy from a physical store or online store. “Vendor’s credibility” and “commodity quality” are the next criteria that consumer looks into9.
7
Exhibit 9. Criteria for consumers to choose to buy online or via offline channels, 2013 Criteria
People who say they consider this criteria (%)
Commodity price
70.3
Vendor credibility
39.3
Commodity quality
38.0
Delivery fee
33.9
Comments of users or friends
32.4
Delivery speed
23.3
Goods in stock or not
20.7
Convenient return or exchange of goods
12.5
Flexible delivery time
6.0
Visiting familiar sites directly almost without price comparison
2.1
Source: iResearch, May 2014
Chinese shoppers engage actively on social media platforms QQ, WeChat and Sina Weibo are some common social media platforms. They all have hundreds of millions of monthly active users.
Exhibit 10. Number of monthly active users of selected social media, as of 2Q14 Social Media
Active users
QQ
829.0 million10
WeChat
438.0 million11
Sina Weibo
156.5 million12
Renren Source: Internet sources; compiled by Fung Business Intelligence Centre
44 million13
8
Competitive landscape C2C represents a dominant market share, yet B2C is expanding quickly In 2013, the C2C and the B2C segment accounted for 59.6% and 40.4%, respectively, of the total transaction value of online retailing in China. It is expected that the transaction value for B2C segment will exceed C2C by 201514.
Exhibit 11. Share of online retailing in terms of transaction value, 2010–2017 (estimates) C2C 86.3%
74.7%
65.4%
59.6%
B2C 13.7%
25.3%
34.6%
40.4%
‘11
‘12
‘13
2010
52.0%
45.9%
41.9%
39.5%
48.0%
54.1%
58.1%
60.5%
‘14e
‘15e
‘16e
‘17e
Source: iResearch, July 2014
Taobao is the market leader in the C2C market Taobao is the dominant market leader. As of December 2013, Taobao achieved 96.5% of the market share, while Paipai had 3.4% and Eachnet had 0.1% market share15.
Exhibit 12. Market share of C2C market, as of December 2013 C2C competitors
Market share (%)
Taobao
96.5%
Paipai
3.4%
Eachnet
0.1%
Source: 100EC.CN, March 2014
Tmall and JD.com are the two largest B2C players The two largest B2C players, Tmall and JD.com are both open platform operators— Tmall has a dominant share of 57.4%, while JD.com has a share of 21.0%16. The two leading platforms together accounted for 78.4% of the B2C market. n
Exhibit 13. Market share of B2C market, 2Q14 B2C competitors
Market share (%)
Tmall
57.4
JD.com
21.0
Suning
3.1
VIPshop
3.0
Gome
2.0
Amazon China
1.6
Dangdang
1.5
Yihaodian
1.4
Yixun
1.4
Others
7.6
Source: iResearch. July 2014
Comparison of e-commerce players, 2013
9
Tmall
JD.com
Suning
VIPshop
Gome
Amazon China
Dangdang
Yihaodian
Jumei
Î
70%
94%
73%
62%
18
30%
6%
27%
38%
Categories
All
All
3C/home appliance and others
Apparel and others
3C/home appliance and others
All
Books and others
Grocery and others
Cosmetics and others
In-house logistics
Î
Î
Third party logistics
Number of warehouses19
n/a
86
12
5
5
108
21
5
2
Active users (million)20
231
47
n/a
9
n/a
n/a
21
n/a
11
Gross margin21
n/a
9.9%
15.0%
23.5%
15.0%
27.2%
16.6%
n/a
41.3%
Direct sale?17 Marketplace?
Source: Internet sources; compiled by Fung Business Intelligence Centre
Commission rates for different categories on different e-commerce platforms, 2013 (%) Tmall22
JD.com23
Amazon China24
Suning25
Yihaodian26
Dangdang (BoA data)27
Gome (BoA data)
Apparel
5
6-8
10
5
6
8-12
4
Shoes and bags
5
7-8
10
5
6
5-10
4
Outdoor and sports
5
5-9
10
2-5
2-6
5-10
4
Baby and maternity
2-5
2-8
8
2-5
2-6
8
2
Beauty and personal care
4
5
6
3-4
6
5-10
3
3C
2
n/a
4
0.5-4
2
1-2
1
2-5
n/a
4
4-6
2
2
2
Household and furniture
2-5
7-8
10
2-5
4-6
4-8
1-3
Jewellery
0.5-5
1-8
15
0.5-5
1-6
10-15
4
Food
1-2
3-5
7
1-3
2-5
n/a
2 0
Home appliance
Book and media
2
5
8
2
n/a
n/a
Healthcare and drug
3
5-8
6
3
5
n/a
3
Instruments
2
n/a
10
2
n/a
n/a
n/a n/a
Services
0.5-2
n/a
10
n/a
n/a
n/a
Auto parts
2-3
3-6
7
2-3
n/a
n/a
2
Telecommunication
0.3-3
3-6
4
2
n/a
n/a
n/a
2
n/a
10
n/a
2
n/a
n/a
Travel
Source: Respective company websites; compiled by Fung Business Intelligence Centre
Top 10 trends
10
#1: M-commerce leaps in popularity, while s-commerce gradually emerges The year 2014 marks an impressive jump for mobile commerce (m-commerce); the rising popularity of mobile devices across China has not only changed the way people communicate, but also the way they shop. The mobile platform is now a highly popular sales and marketing channel. According to China Internet Network Information Centre (CNNIC), the number of m-commerce users reached 205 million in 1H14, accounting for 32% of China’s total Internet population28. iResearch estimates the total transaction value of mobile shopping will exceed 3,207 billion yuan by 2017, up from 274 billion yuan in 201329. Consumers are able to use their mobile devices to search products online, scan quick response (QR) codes directing them to retailers’ websites, and make purchases anywhere, at any time. To drive sales, retailers can also interact with consumers with targeted promotions. The increasing sophistication of mobile payment particularly underpins m-commerce development. A large proportion of online shoppers still adopt cash-on-delivery when purchasing online, but they are becoming increasingly accustomed to mobile transactions. Mobile transaction values reached 1.38 trillion yuan in 2Q14, up from 0.1 trillion yuan in 2Q1330. The top player in the mobile payment market, Alibaba’s Alipay, accounted for 79.9% of market share in 2Q1431. Indeed, more retailers have partnered with leading e-commerce companies such as Alibaba and Tencent to offer mobile payment services. For instance, TeeMall, a shopping
mall operator based in Guangzhou, has allowed customers to use the Alipay mobile wallet to settle payments as from August 201432. Wangfujing Department Store has partnered with Tencent’s WeChat Payment to launch a mobile payment service in selected branches33. At the same time, social media is playing a larger role in supporting consumer purchase decisions. Chinese consumers, in particular, are used to voicing their opinions on social networking sites (SNS). iResearch estimates that over 60% of Chinese online shoppers wrote comments via SNS after purchasing online. So many retailers leverage the huge user databases of popular SNS such as Tencent’s WeChat34 and Weibo35 to promote their products and services. In tandem, the trend for selling on SNS (otherwise known as social commerce or s-commerce), is gaining traction. Mogujie, one of China’s most popular fashion and beauty social shopping platforms, is a case in point. It started as a Pinterest-style shopping-guide website in 2011, and later transformed into a transactional website selling apparel and beauty products36. As of August 2014, Mogujie’s daily active users numbered 80 million, and around 6,000 retailers have set up stores on Mogujie37. Mogujie places particular emphasis on its mobile strategy; it has built a well-devised mobile app, allowing buyers to exchange information and customers to easily find required products and settle payment at their fingertips. Some 65% of transactions on Mogujie are reportedly made via its mobile app38. Meilishuo, another popular fashion and
beauty SNS, built its own trading platform in 2013. Today, it reportedly has 10,000 retailers on its platform. To facilitate online transactions, Meilishuo partnered with WeChat in early 2014 to promote selected fashion products available to respective users via its mobile app39. Shoppers can also use WeChat to settle payments when they buy online. Some 70% of Meilishuo’s total sales revenue is reportedly generated via its mobile app40. #2: China’s “diaosi” are set to become mainstream consumers Rapidly changing consumer attitudes and purchasing behaviour are reshaping China’s retail landscape. Recently, many retailers and brand owners have realised that an underclass of consumers may be where the real money is, and they are turning to target a vast market. This group of consumers, commonly known as “diaosi”, is increasingly becoming the sector to watch. The term “diaosi” originally referred to young men with low incomes and limited prospects, and they spend much of their free time – and disposable income – on the Internet41. Especially with luxury sales growth slackening, this group is becoming a formidable sector in China’s retail market. The rise of “diaosi” has been driven by two major forces in Chinese consumption – rising consumer prices and an emerging virtual economy42. According to research by Sohu in March 2013, there were 526 million people labeled as “diaosi”43. They opt for quality goods that represent value for money, and they like to shop online. Their individual spending may not be comparable
to the rich, but the large number of individuals involved plays a significant role in driving China’s consumption growth. Some of the country’s most successful Internet companies, such as Tencent, have placed huge emphasis on this group of consumers. As well as providing instant messaging services, e-commerce platforms and mobile payment solutions, Tencent offers numerous online, multiplayer games through its game portal, games that are highly popular among the “diaosi”. Another example is China-based, budget smartphone maker, Xiaomi. The company offers budget smartphones with functions comparable to famous brands. Its “hungry sales” online strategies (characterised by limited volumes sold only online over a short period of time) are particularly favoured by the “diaosi”. The rise of this major consumer group is set to continue. Retailers may need to rethink their strategies; they should be providing more products that show valuefor-money, while increasing their focus towards online marketing initiatives. #3: Leveraging Big Data and technologies for success In today’s digital world, the use of Big Data in e-commerce has become a competitive differentiator. Mining Big Data enables retailers to understand and anticipate the needs of their target customers, thus building consumer loyalty. As Chinese shoppers now demand a more personalised “shopping experience”, some retailers are leveraging mobile technologies to explore consumer preferences and gather location-
11
12
based information; their intention is to launch tailor-made marketing campaigns. For instance, in August 2014, Wangfujing Department Store announced a cooperative initiative with Baifendian Corporation, a domestic Big Data analytics solutions company, to collect and analyse consumer data44. Similarly, Intime Department Store recently formed a partnership with Baidu, China’s largest player in the search engine market, to use Baidu Eye (a Chinese version of Google’s Glass) to provide a new shopping experience45. Baidu Eye supports voice and gesture commands and sends information to customers’ mobile devices. It can recognise all the department store’s products and brands, and can track customers’ movements so as to enable them to locate the products they are looking for. In another case, Alibaba recently acquired AutoNavi, a mapping and navigation company; this has enabled Alibaba to further expand it mapping services on its C2C platform, Taobao (as well as its Taobao mobile platform), so customers can more conveniently pinpoint location-based deals46. Other players are applying the latest technologies (such as RFID and augmented reality) to stimulate online shopping. For instance, fast fashion chain Uniqlo recently launched a “virtual dressing room” on its website, allowing customers to digitally try on clothes47. Shoppers can choose a virtual model that has a similar body size, and place the clothes of their choice on the model to see how well they fit before making a purchase. JD.com, China’s second largest B2C platform operator, has also added a similar feature on its mobile app48. Users can
take “selfie”-style photos and apply these on virtual models; they can then “virtually” try on the clothes. The Chinese government has been very supportive towards the use of Big Data in e-commerce. In November 2013, the National Bureau of Statistics (NBS) signed a strategic cooperation agreement with 11 domestic e-commerce and Internet companies to jointly develop an action plan for the further application of Big Data49. The NBS will formulate statistical standards for Big Data application and complete and replenish government statistical data, using the information provided by partner enterprises. It is expected that the use of Big Data in e-commerce activities could further help businesses to improve their operational efficiencies. #4: The rise of O2O Advances in technology and increasing access to information through the Internet and mobile connectivity have provoked consumer buying habits and preferences across all channels. More bricks-and-mortar retailers are launching their online and mobile platforms, and using social media to reach their customers. Some pureclick companies are evolving from selling only online to setting up physical stores. In recent times, an increasing number of retailers are exploring “O2O” or “online and offline integration” (known as omni-channel strategies). They try to pull together multiand cross-channel offerings, including physical stores, online and mobile platforms (as well as social media platforms) to create a closed loop for the whole purchasing
process. Major O2O initiatives by selected retailers are shown in Exhibit 14 (on the next page). In short, the following are the most common ways retailers in China are trialing their O2O initiatives: • Launching mobile apps and offering location-based marketing. Many retailers have launched their own mobile apps and leveraged popular social media platforms, such as Sina Weibo and WeChat, to launch personalised and location-based marketing. For instance, Intime Department Store and Rainbow Department Store provide free in-store WiFi services, and customers can receive personalised coupons and promotional deals via retailers’ mobile apps50. • Offering mobile payment services instore. An increasing number of retailers have partnered with leading e-commerce companies, such as Alibaba and Tencent, to offer mobile payment services. The most common mobile payment tools include Alibaba’s mobile Alipay, together with Tencent’s WeChat mobile payment and Weibo payment schemes. • Using QR codes to support online and offline integration. A typical example is Metersbonwe, a domestic apparel chain. A unique QR code is printed on the product tag of each product available at Metersbonwe; when customers use their mobile devices to scan the QR code they will be directed to the product page on Banggo.com, Metersbonwe’s online store. They can receive the product information and can shop online via their mobile devices. • Creating a shared customer database
and loyalty programme. Some leading retailers such as Intime Department Store51 and Suning52 have integrated their online and offline membership programmes. A single, integrated account allows retailers to capture purchasing data across different platforms. • Supporting “click and collect”. Some retailers have made it possible for customers to buy online while picking up the items in a physical store. For example, in addition to offering pick-up services at its physical outlets, Rainbow Department Store has expanded such services to allow customers to pick up their online purchases from one of its “O2O Store” locations, a convenience chain set up by the department store operator in Shenzhen in July 201453. • Integrating back-end operation. To ensure smooth implementation of O2O, some retailers have integrated their back-end operations and systems such as inventory, warehouse and logistics management systems. For example, Shopin Discount Store has integrated its store inventory management system with those provide by suppliers54. • Unifying online and offline pricing. Suning, a leading home appliance retailer, is the forerunner in unifying prices for its online and offline offerings. The company offers the same price on its online and offline platforms at regional or city levels55. It also adopts a dynamic pricing model by using web crawling tools to monitor and compare competitors’ prices.
13
Department store, convenience store
Discount store
Department store, shopping mall
Department store
Hypermarket. supermarket, department store
Convenience store
Retailer
Rainbow Department Store
Shopin Discount Store (Hangzhou branch)
Intime Department Store
Guangzhou Friendship Department Store
Better-Life Chain Supermarket
Hongqi Convenience Store
Î
Î
Î
Î
Î
Third party platforms
Î
WIP †
Mobile portal
Social media: Sina Weibo
Online/mobile initiatives
† Better-Life Chain Supermarket’s mobile app is under development, and reportedly launches in October 201456.
Major operating formats
Own transactional website
Exhibit 14. O2O initiatives for selected retailers, as of September 2014
Social media: WeChat
Online and offline integration
• Integrates online and offline membership • Order online, collect in offline stores
• Order online, collect in offline stores
• Free WiFi • Touch-screen devices available • Displays QR codes on wall • Supports mobile payment (soon) • Touch-screen devices available • Supports mobile payment
• Integrates online and offline membership • Same price for products which are common to online and offline channels
• Integrates online and offline membership • Same price for products which are common to online and offline channels
• Free WiFi • Displays QR codes on wall • Supports mobile payment • Free WiFi • Supports mobile payment
• Integrates online and offline membership • Same products and same price for online and offline channels
• Integrates online and offline membership • Order online, collect in offline stores or in third party pick up points • Goods purchased online can be returned to stores or by post
• Free WiFi • QR codes on tags for every product • Supports mobile payment
• Free WiFi • Touch-screen device in some store branches • Displays QR codes on wall • Supports mobile payment
In-store initiatives
14
Uniqlo
Zara
Suning
Gome
Î
Mobile portal
Social media: Sina Weibo
Online/mobile initiatives Third party platforms
Source: Internet sources; compiled by Fung Business Intelligence Centre
Metersbonwe
Specialty stores
Own transactional website
Social media: WeChat In-store initiatives
• Free WiFi • Displays QR codes in-store • Will support mobile payment
• Free WiFi • Touch-screen devices available • Displays QR codes in-store • Supports mobile payment
• Displays QR codes on tags
• Displays QR codes in-store • Supports mobile payment
• Free WiFi • Touch-screen device in the convenience store branches • Displays QR codes on tags, directing to Banggo. com • Supports mobile payment
Online and offline integration
• Integrates online and offline membership • Order online, collect in offline stores
• Integrates online and offline membership • Same price for products which are common to online and offline channels • Order online, collect in offline stores • Goods purchased online can be returned to stores or by post
• Integrates online and offline membership • Same products and same price for online and offline channels • Order online, collect in offline stores • Goods purchased online can be returned to stores or by post
• Displays QR codes in-store • Supports mobile payment
• Integrates online and offline membership • Same products and same price for online and offline channels
15
16
#5: Online players strengthen logistics services To support their O2O initiatives, some online players have taken a variety of approaches to providing better logistics services. Some platform operators, such as JD.com57 and Dangdang (since 2011)58, have started to offer same-day delivery services. Others, such as JD.com59, Amazon.cn60 and Tmall61, have partnered with convenience store chains to provide customers with self pick up services. In July 2014, JD.com launched a pilot mobile pick up service in Beijing and Chengdu; consumers can pick up their online orders from mobile stations in certain metro stations and community centres, with the service rolling out to residential areas and key transportation hubs in tier 1 and 2 cities later in 2014. Indeed, the Chinese government has been very supportive in the development of self-pick up points across the country. In September 2014, the Ministry of Commerce launched its Opinions on Accelerating the Development of Commercial Logistics, encouraging and supporting e-commerce companies to partner with convenience store chains to provide self pick up services, and supporting the establishment of pick up points in schools, communities and metro stations62. Additionally, a growing number of e-commerce companies have invested heavily in warehousing and inventory management capabilities to gear up for future growth. Exhibit 15 shows the number of warehouses owned by selected online players. JD.com is among the first e-commerce companies to devote
substantial resources to building its own logistics infrastructure. As of June 2014, the company has established 86 warehouses with a total floor area of approximately 1.5 million sqm in 36 cities, with 1,620 delivery stations and 214 pick up stations in 495 cities across China63. This has made sameday delivery available in 43 cities. The trend for investing in warehousing is expected to become increasingly important in supporting flexible inventory management, timely delivery and replenishments. Exhibit 15. Number of warehouses of selected online players (as of June 2014)
Number of warehouses GFA (sqm)
JD.com
Jumei
VIPShop
Dangdang
86
5
5
21
1,500,000
2,000
Donggaozhuang village
Hebei
Xingtai
Qinghe
Yang’erzhuang
Wool
1,800
>600
Baigouxincheng
Hebei
Baoding
Gaobeidian
Baigouxincheng
Bags and suitcases
50,000
> 3,000
Qingyanliu village
Zhejiang
Jinhua
Yiwu
Dongjiang Road
Commodities
8,000
2,200
Bainiu village
Zhejiang
Hangzhou
Lin’an
Changhua
Nuts
1,500
50
Xindu village
Zhejiang
Hangzhou
Lin’an
Qingliangfeng
Nuts
1,800
>20
Beishan village
Zhejiang
Lishui
Jinyun
Hu
Outdoor apparel
70 households
>100
Xishan village
Zhejiang
Lishui
Songyang
Dadongba
Furniture
980
32
Peixie village
Fujian
Longyan
Xinluo district
Xiaochi
Bamboo mats, decoration
700
>60
Zaomei village
Fujian
Quanzhou
Anxi
Xiangxing
Vine and metal decoration
1,650
>1,000
Wantou village
Shandong
Binzhou
Boxing
Jinqiu Road
Strawplaited homeware
4,000
1,000
Gujia village
Shandong
Binzhou
Boxing
Boxing
Raw fabrics
n/a
>100
Dinglou village
Shandong
Heze
Cao
Daji
Stage costumes
1,100
> 300
Zhangzhuang village
Shandong
Heze
Cao
Daji
Stage costumes
1,500
>240
Shuanglin town
Jiangxi
Xinyu
Fenyi
Shuanglin
Apparel, local specialties
n/a
>600
Junpu village
Guangdong
Jieyang
Jiedong district
Xichang
Food, apparel
2,700
>1,500
Lirendong village
Guangdong
Guangzhou
Panyu district
Nancun
Apparel
5,486
>200
Xi’ao village
Zhejiang
Wenzhou
Yongjia
Qiaoxia
Toys
230 households
>500
Source: Aliresearch, December 2013
passenger car businesses, eight passenger car brands, with over 2,000 distributors. Customers can buy automobiles online at a discount and collect them directly from the distributors. #10: Online retailers go rural; “Taobao village” a unique feature Rapid urbanisation and increased online spending by rural residents have made lower-tier cities and rural areas the new target markets for online retailers. According to a report by Aliresearch, the growth rate of online transactions in counties and villages outpaced that of cities by 13.6 percentage points in 201393. Some e-commerce giants such as Alibaba, JD.com and Dangdang (the latter being China’s largest online bookseller), have each expressed their intentions to further expand in the rural market. In turn, an increasing number of rural residents are leveraging e-commerce platforms to make a living. As of November 2013, there were more than one million online retailers in the rural areas. In particular, Taobao has become increasingly important to rural communities across China. Groups of local residents or manufacturers in certain villages have set up online stores on Taobao; these are commonly known as “Taobao villages”94. According to a report released in December 2013 by Alireserach95, there were 20 “Taobao villages” across the country, creating about 60,000 jobs in peripheral industries such as packaging, logistics, marketing and training. Most “Taobao villages” are located in Zhejiang, Guangdong, Jiangsu, Shandong,
Jiangxi, Fujian, and Hebei provinces96 (see Exhibit 21, previous page). It is noteworthy that many online shops in the same “Taobao village” sell similar products, forming an online industry cluster. For instance, Qingyanliu village in Yiwu city, Zhejiang Province, is the top “Taobao village” in terms of e-commerce sales, focusing mainly on small commodities and general merchandise; Baigao, another major “Taobao village” located in Hebei Province, specialises in selling luggage. Recently, some well-established online shops have shifted their operations from Taobao to Tmall, Alibaba’s B2C platform; others have built their own brands. Munuan Straw House, an online store on Tmall selling its own straw furniture brand “Munuan”, originated in Wantou, a “Taobao village” in Shandong97. The growth of “Taobao villages” has brought vitality to rural areas, and marked an important step in the process of rural modernisation. Specifically, it helps lift the incomes of rural residents and narrows the urban-rural income gap. Some “Taobao villages” such as Junpu village in Guangdong, with the support of local government, has taken a step further by opening a “Taobao university” to teach people how to sell online. The local government in Junpu village has provided support by offering free wireless Internet connections to residents, as well as tax credits98. n
23
Conclusions
24
The future of e-commerce looks promising for many businesses, underpinned by growing numbers of e-commerce and m-commerce users, the greater sophistication of mobile technologies and online payments and an extensive logistics and delivery system. That said, fierce competition is here to stay. Moreover, rapidly evolving consumer needs constantly reshapes both the online and offline space. To survive and prosper in this environment, businesses need to keep the following suggested imperatives in mind: • • • •
Make full use of Big Data to better understand consumer needs and preferences Embark on a comprehensive mobile and social media strategy Leverage the latest technologies to improve in-store experiences Customer “experience” is the focus of O2O; but there is no one-size-fits-all strategy; players have to come up with their own O2O strategies to adapt to changing customer needs • Leverage the vast web of businesses and huge traffic flows of China’s e-commerce giants; retailers can set up online stores on these e-commerce platforms, or partner with them, to roll out digital marketing campaigns, mobile payment solutions and other O2O initiatives • Improve the quality of products and services; enrich product offerings, and refine tailored merchandise and assortments for different consumer segments. n
Endnotes
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company.” Assessed 11 September, 2014. Wanda Group. http://www.wanda-group.com/2014/ latestnews_0829/754.html 90. “E-commerce in China facing new opportunities in medicine sale.” 27 August, 2014. TechNode. http:// technode.com/2014/08/27/e-commerce-china-facingnew-opportunities-medicine-sale/ 91. “Alibaba’s ambition in online pharmacy retailing.” 30 May, 2014. China Internet Watch. http://www. chinainternetwatch.com/7556/alibabas-ambition-inonline-pharmacy-retailing/ 92. “SAIC Motor launches O2O strategies.” 27 March, 2014. Ebrun. http://www.ebrun.com/20140327/94850. shtml 93. “China’s rural areas outpace cities in online shopping.” 3 July, 2014. China Daily. http:// usa.chinadaily.com.cn/business/2014-07/03/ content_17640207.htm 94. Alibaba defines a “Taobao Village” as one with more than 10% of its households running online stores on Taobao and annual e-commerce sales exceeding 10 million yuan. 95. “Registered Taobao stores in China’s rural areas Up 76.3% in 2013.” 6 January, 2014. China Internet Watch. http://www.chinainternetwatch.com/5796/taobaovillages-2013/#ixzz3Cgt9odHi 96. “20 Taobao villages have emerged nationwide.” 28 December, 2014. Zhejiang News. http://zjnews.zjol. com.cn/system/2013/12/28/019782601.shtml 97. Munan website - http://munuan.tmall.com/ 98. “Cash cow, Taobao.” 24 May, 2014. The Economist. http://www.economist.com/news/china/21602755one-small-hamlet-teaching-people-how-sell-onlinecash-cow-taobao
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